Assessing FEMSA's Q2 2025 Earnings Disappointment and Strategic Buyback Plan

In the second quarter of 2025, Coca-Cola FEMSA (KOF) delivered a mixed earnings report that revealed both challenges and strategic opportunities for long-term investors. While the company faced a 5.5% volume decline in key markets like Mexico, Brazil, Colombia, and Panama, it offset some of these losses with revenue growth in Argentina, Uruguay, Guatemala, and Nicaragua. This performance highlights both the headwinds FEMSA is navigating and its ability to adapt to regional dynamics.

Earnings Disappointment: A Closer Look

Despite the volume decline, FEMSA managed to increase total revenues by 5.0% to Ps. 72,917 million, driven by revenue management initiatives and favorable currency translation effects. On a currency-neutral basis, revenue grew by 2.4%. This demonstrates the company's ability to leverage pricing strategies and currency dynamics to maintain top-line growth.

However, the earnings report also revealed some concerning trends in profitability. Gross profit increased by 3.4% to Ps. 33,042 million, but gross margin contracted by 70 basis points to 45.3%. This contraction was attributed to lower operating leverage, unfavorable mix effects, and higher fixed costs. Operating income remained relatively stable, increasing by 0.2% to Ps. 9,767 million, but operating margin contracted by 60 basis points to 13.4%. On a currency-neutral basis, operating income decreased by 2.6%.

Net income attributable to equity holders of the company was Ps. 5,312 million, a decrease from Ps. 5,608 million in the same period of the previous year. Earnings per share for the second quarter were Ps. 0.32, with earnings per unit at Ps. 2.53 and per ADS at Ps. 25.29. These figures indicate a modest decline in profitability, which may raise concerns among investors seeking consistent growth.

Strategic Share Repurchase Plan: A Ray of Hope

Amid these earnings challenges, FEMSA announced a $250 million accelerated share repurchase (ASR) agreement on May 19, 2025. This strategic move is designed to enhance shareholder value by reducing the number of outstanding shares, thereby increasing earnings per share. The ASR involves repurchasing shares through a derivative instrument with a U.S.-based financial institution, with an initial delivery of 483,559 ADSs scheduled for May 20, 2025. The final number of shares repurchased will depend on the daily volume-weighted average price of the ADSs during the ASR period, adjusted for a discount. The transaction is expected to be fully settled by the third quarter of 2025.

The market reaction to the share repurchase program was overwhelmingly positive. Coca-Cola FEMSA's stock surged by 4.77% in pre-market trading on May 20, 2025, reflecting heightened investor confidence. This positive reaction occurred despite broader concerns about inflation expectations and potential headwinds for equities, suggesting that investors view the ASR as a proactive measure to strengthen the company's balance sheet and reward shareholders.

Evaluating Long-Term Value

FEMSA's share repurchase program is a strategic move that aligns with its broader capital allocation framework and commitment to enhancing shareholder returns. The company has demonstrated strong financial discipline, as evidenced by its recent $500 million senior note issuance on May 1, 2025. This financing, which attracted strong investor demand, reflects FEMSA's access to capital markets at favorable terms and its ability to manage its debt obligations effectively.

The company also paid the second installment of the ordinary dividend in July 2025, distributing a total cash amount of Ps. 3,865.5 million. This demonstrates FEMSA's commitment to maintaining a strong dividend policy while also investing in long-term growth. Additionally, FEMSA's digital initiatives, such as the Juntos+ v 4.0 app, saw significant user growth, reaching 8 times more users compared to the previous year. These initiatives highlight the company's focus on innovation and customer engagement, which are critical for long-term value creation.

FEMSA's inclusion in the FTSE4Good sustainability indices for the tenth consecutive year, with an improved score of 3.9 out of 5.0, further underscores its commitment to sustainability and transparency. This focus on environmental, social, and governance (ESG) factors is increasingly important for investors who prioritize long-term value and responsible investing.

Investment Implications

While the Q2 2025 earnings report revealed some short-term challenges, FEMSA's strategic share repurchase program and strong financial position provide a compelling case for long-term investors. The ASR is expected to enhance shareholder value by reducing the number of outstanding shares, thereby increasing earnings per share. This move, combined with the company's recent debt issuance and dividend payments, demonstrates FEMSA's ability to manage its capital structure effectively and reward shareholders.

Analysts have generally maintained a positive outlook on FEMSA, with the most recent analyst rating on KOF stock being a "Buy" with a price target of $112.00. Spark, TipRanks' AI Analyst, also rated KOF as an "Outperform," citing the company's strong financial performance and reasonable valuation as key strengths. However, the earnings call highlighted both progress and challenges, with technical analysis indicating some short-term weakness in the stock.

Despite these mixed signals, the company's CEO, Ian Craig, reiterated FEMSA's commitment to long-term sustainable growth, including investments in capacity and capabilities across its markets. The company's updated guidance for comparable net revenues (non-GAAP) expects a 1% to 2% currency headwind based on current rates and including the impact of hedged positions, plus an approximate 1% headwind from acquisitions, divestitures, and structural changes. The underlying effective tax rate (non-GAAP) is estimated to be 20.8%, compared to 18.6% in 2024.

Conclusion: A Strategic Play for Long-Term Value

In conclusion, FEMSA's Q2 2025 earnings report may have disappointed some investors with its volume decline and margin contraction, but the company's strategic share repurchase program and strong financial position offer a compelling case for long-term value. The ASR is a proactive measure to enhance shareholder returns and align with the company's broader capital allocation strategy. Given FEMSA's financial discipline, strategic initiatives, and commitment to sustainability, the company is well-positioned to navigate the current economic environment and deliver value to its shareholders in the long term.

For investors considering FEMSA, the key is to balance the short-term earnings volatility with the long-term strategic moves the company is making. The $250 million share repurchase program, combined with the company's recent debt issuance and dividend payments, suggests a strong commitment to shareholder value. While the road ahead may not be without challenges, FEMSA's strategic initiatives and financial strength provide a solid foundation for long-term growth and value creation.